Scarcity is Here to Stay – Challenges and Options for Action for Europe

The last few decades have been characterized by rising material prosperity worldwide – due to, among other things, a growth-promoting global population development, advancing globalization and cheap raw materials. All three conditions are now changing in a growth-dampening direction. With the world population continuing to rise, this means increasing scarcity. Without a political response from the EU, there is a risk for social tensions to develop – within individual member states and between them.

There are three central reasons for the strong growth of the last three decades: a growth-friendly demographic structure, specialization gains from globalization and cheap environmental resources.

#1 Growth-friendly demographic structure

One cause of high material prosperity is a large share of working-age people in the total population. This results in a high supply of labor. If the labor market has a large supply of workers, the price for this factor of production – i.e., wages – is relatively low. Companies are therefore willing to hire additional workers, which means a larger quantity of goods produced.

Employees earn income from work, part of which they save. Their savings rate is higher than that of pensioners and even more so than that of children and young people. When a high share of the total population is of working age, the economy has a high savings rate – and high savings enable high investment.

As a result, workplaces are equipped with many machines and modern technologies. Employees are therefore able to achieve a high level of productivity.

#2 Specialization gains from globalization

Since the end of World War II, import tariffs have been greatly reduced worldwide. The fall of the Iron Curtain in 1989 integrated the economies of Eastern Europe into the international division of labor. In 2001, China’s entry into the World Trade Organization (WTO) further intensified globalization by integrating China into the world economy.

For Europe, the introduction of the European Single Market meant an additional step forward in integration.

If all countries specialize in the production of the goods and services in which they have cost advantages, there will be gains in specialization in the countries involved – and thus the quantity of goods available will increase.

#3 Cheap environmental resources

A third driver of economic growth in recent decades has been the use of natural resources at a price that does not reflect all the costs associated with their consumption.

Using fossil fuels such as oil, natural gas and coal leads to global warming and climate change via greenhouse gas emissions. The consequences include damage to buildings and infrastructure due to weather extremes, adverse health effects, mass extinction of animal and plant species, and declining crop yields. The resulting economic damages are not, or at best only partially, included in market prices.

The failure to price in the additional social costs results in overexploitation of the natural basis of life. Although this allows for a higher gross domestic product (GDP), it is too large or unsustainable when measured against the actual costs. Goods are produced whose overall social benefit is lower than their overall economic cost.

All three factors above are, however, bound to change in the years to come, which in turn is likely to inhibit prospective growth in aggregate output.

Aging and growth of the world population

Since 2015, the share of working-age people in the total population has been declining worldwide. In Europe, the decline is particularly sharp. An age-related shortage of labor means fewer production opportunities.

The disposable incomes of those of retirement age are lower than those of the working population. This reduces the savings opportunities of retirees. Consequently, there is a decline in the overall economic savings rate with diminishing investment opportunities. This has a negative impact on the production capacity of the economy and on the productivity of the workforce.

Deglobalization and geopolitical tensions

Protectionist measures are reducing the specialization gains resulting from advancing globalization. Since the outbreak of the global financial and economic crisis triggered by the Lehman bankruptcy in 2008/09, trade restrictions have been expanding.

The corona pandemic caused international supply chains to be repeatedly disrupted and trade to decline. It also gave a further boost to global protectionism. Thus, during the pandemic, many countries put export restrictions on essential products to prevent supply bottlenecks at home.

Furthermore, it is to be feared that many economies will increasingly use trade policy instruments in the future to achieve geopolitical goals. Possible instruments for this are in addition to tariffs, sanctions, export restrictions, export bans and much more.

The Ukraine war is likely to result in an additional permanent deglobalization push. There is a threat of a renewed bloc formation – on the one hand, democratic countries from Europe, America, Oceania and Asia with a market economy and, on the other hand, autocratic states (China, Russia and their most important trading partners.) In addition, there could be a third bloc with countries such as India, which avoid a clear classification.

Rising carbon prices, supply chain disruptions and the desire for self-sufficiency in essential products ultimately speak for increased reshoring, i.e., the relocation of production from distant low-wage countries back to Europe.

Climate change and climate protection

Climate change dampens global production of consumer goods through at least three channels: First, through the destruction of physical production facilities, transportation routes, and other key infrastructure. Second, through climate-related crop losses, and third, through increasing water scarcity. The latter affects drinking water scarcity, agricultural production, production facilities that require water cooling, and water-intensive production processes.

The urgently needed ecological transformation requires extensive investments to establish climate-neutral production and transport infrastructure. This ties up productive machinery and labor that can no longer be used to manufacture consumer goods.

Five fields of action to deal with growing scarcity

The growth-dampening effects outlined above come up against a growing global population: According to United Nations estimates, the world’s population will increase from around 7.7 billion to 9.7 billion between 2019 and 2050 causing higher demand for consumer goods.

If there is an increasing scarcity of goods in many areas, there is then the threat of growing distribution conflicts and social tensions – both within individual countries and between nations.

To avoid this, economic policy interventions are necessary. Above all, measures are needed to increase the quantity of available consumer goods in an environmentally compatible way. This requires productivity increases and an increase in labor force participation. Key factors here are the education and healthcare systems as well as research and development.

In many areas, a joint European approach would be a good idea. Among other things, joint research and development efforts in the context of decarbonization should be considered to achieve green growth, i.e., an increase in real GDP with a simultaneous reduction in greenhouse gas emissions.

To keep costs of the urgently required decarbonization as low as possible, Europe should also draw on supplies from abroad. For example, it is possible to import renewable energy and climate-neutral hydrogen from countries with a lot of solar, wind and water energy. This requires new economic cooperation, for example, with countries in North Africa.

All these measures should be taken immediately because the economic conditions in Europe are still relatively favorable. The longer we wait to make the necessary adjustments, the higher the economic and social costs for society will be.

About the author

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Most recently, he worked on the effects of carbon pricing and the benefits of a potential global climate club.

Note: This article is based on the Bertelsmann Stiftung’s Megatrend Report #04 entitled “Die Rückkehr der Knappheit – Wie globale Demografie, Deglobalisierung und Dekarbonisierung Verteilungskonflikte verschärfen “, which is only available in German (Megatrend-Report #4: Die Rückkehr der Knappheit: Bertelsmann Stiftung (bertelsmann-stiftung.de)).

An English summary of the reports can be found in this MegatrendBrief (Megatrend Brief #4: The Return of Scarcity: Bertelsmann Stiftung (bertelsmann-stiftung.de)).